Can Facebook Make Instagram a Money Machine?

Screen Shot 2013-06-17 at 1.14.42 PM“A small team has been working on a big idea. Join us for coffee and learn about a new product,” read the invitation for Facebook’s June 20 event, delivered to reporters via snail mail on Friday in a clean white envelope. While the wording may be meant to convey mystery, reports have indicated that the technology world is pretty sure that the social network will announce a video update to Instagram, its popular photo-sharing app.

A source told TechCrunch that Instagram will begin to allow users to take and share short videos. “Call it the Vine effect,” wrote the publication’s Ingrid Lunden on Monday, referencing Twitter’s increasingly popular video-sharing service. However, such an update would not exactly be a big idea, although it is a move that would make sense for Facebook. After all, Instagram already has 100 million monthly active users, who collectively upload approximately 40 million photos per day, and it is no stretch of the imagination to assume that giving the service video capabilities would boost content sharing.

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Even more importantly, Facebook needs to respond to the rising popularity of video-sharing services. The Vine app — which is able to capture six seconds of video footage on handsets running either Apple’s (NASDAQ:AAPL) iOS or Google’s (NASDAQ:GOOG) Android — has become hugely popular since it debuted in January. In fact, once Twitter released the Android version of the app at the beginning of June, usage hit a tipping point: the number of social media shares of Vine videos surpassed those of Instagram photos on Twitter. Since then, usage statistics have only diverged even more.

One reason that Instagram’s numbers have fallen is because Twitter no longer shows inline views of photos, and that may have affected how many Instagram photos have been shared on Twitter. Of course this move — which was partly driven by Facebook — has actually driven more traffic to Instagram, which is a popular social network in its own right. After Facebook bought the company last year for $715 million, its user numbers ballooned. Adding a Vine-like video sharing service to Instagram could draw even more users because it will mean one less app to mess with and one less social network to build up.

There is other evidence that corroborates TechCrunch’s source. Former Reuters social media editor Matthew Keys wrote last month on his blog that an anonymous Facebook source had informed him that the social network was internally testing a video feature for its photo share social network.

Adding video to Instagram would also be very appealing to advertisers and marketers. But, while the medium is very attractive, Instagram does not currently run any advertisements, and its earliest attempt to pave the way for advertisers was met with user outrage. In December, Instagram announced an update to its Terms of Service, with one clause that appeared to indicated that the photo-sharing application has the right to use members’ photographs for advertisements. The clause was similar to one found in Facebook’s own terms, but the commotion on Twitter was loud enough that the change was rolled back and an apology issued. Still, on Facebook’s last quarterly earnings call, Chief Executive Mark Zuckerberg did note that big brands were interested in advertising on Instagram, even though he said there were no plans yet to implement any advertising.

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Even Facebook’s own communications seem to indicate an expansion of Instagram. “We’ll continue to roll out more features in the coming weeks and months, including trending hashtags and deeper insights, that help people discover more of the world’s conversations,” Facebook’s Greg Lindley wrote on Facebook’s blog last week. However, it should be noted that Facebook did not want any details of this event to be leaked, so the Instagram report could be intentionally misleading. But if it proves to be correct, the event invitation, complete with a coffee stain, would be quite a red herring.

Follow Meghan on Twitter @MFoley_WSCS

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